Swine Industry Update: Unprecedented Times
As I reflect from time to time about the events that keep occurring I shake my head. I think of things that have occurred in agriculture as well as what is happening in the financial markets. As a nation we are facing unprecedented turmoil in the financial sector at a time when demand for credit in agriculture will undoubtedly increase due to dramatically escalating input costs. Despite the turmoil, Farm Credit System institutions continue to provide a steady supply of credit to farmers, ranchers, their cooperatives and others in rural America.
In the hog sector, we have seen cost of production rise by over $50 a head from a year and a half ago. We have breakeven costs on corn over $850 an acre in Southern Minnesota for next year compared to $600 an acre this fall. The ever increasing cost of production in the ag sector has far reaching implications. Just because costs are up that does not mean commodity prices will be high and you will need to manage your risk through this changing time period. In addition, part of this equation includes the need for capital by all of ag to fund this increased cost of production.
The events in the financial markets this past week may put a strain on getting access for capital for producers as we move forward. The Farm Credit System which is the largest funding of the ag sector gets a lot of its funding from the bond market. The Farm Credit System has a very high bond rating and is considered a very good investment which is good news The bad news is you have such a demand for much capital from the entire ag sector that it is hard to keep up. Capital for producers will be available but in order to get this loan rates will be higher and fees will be charged because of the high demand. Producers will be required to have better financial information in order to access this capital. The dynamics of what has occurred in the financial markets and the high demand for capital has changed the access to capital for the near future.
I spoke at the conference with Brett Stuart from Global Agritrends. I will try to give you a couple of items concerning global pork production.
World Overview and the China Factor
The world sow herd and associated pork production grew at a rapid pace from 1960 to 2006 as shown in Chart 1 – World Sow Stocks and Pork Production. However, 2007 and 2008 (forecast) show a strong trend reversal with sow/pork declines globally. The biggest factor has been Chinese disease losses and production declines. In mid-2007 Chinese blue-ear disease ravished the countryside, killing 20+ million hogs. The winter brought harsh blizzards into key pork regions of China, further stressing animal health. And the 2008 earthquakes in Sichuan province, further exaggerated losses.
Keep in mind that 56% of the earth’s hogs live in China. The following chart, Chart 2 - World Pork Production compares countries in terms of pork production.
The U.S. pork production is reality small when compared to China’s supply. China has 46 million sows and close to 400-500 million pigs on the ground in their country in relation to the U.S. with 6 million sows and 63 million head of inventory. The production issues that they had starting in 2007 along with the other issues such as snow storms, and the earthquake decreased 40 million pigs in their country. This is almost 40% of our entire production for the year.
In summary, there is a reason why they were buying so much of our pork. Now they are on a rapid expansion pattern and they end of having the growth coming from China might be coming to an end.
I also talked about how the U.S. needed to be competitive with long term needs to continue to work on developing people, science and technology if we are to remain competitive in the global marketplace. The importance of all three of these cannot be underestimated. The one to me that is the most important is people. We must continue to find and develop people that have a passion for our industry or it will go away.